Meta Platforms reversed lower yesterday after touching the 600 price level. After a strong run, perhaps upside potential may pause in the short term on Meta stock.
Today, we'll look at a bear call spread that assumes Meta stock won't make much progress in the next few weeks.
Is it odd to be bearish on a stock that currently holds a strong weight on Leaderboard? The key is the short-term nature of this option trade and the choice of strike prices.
Meta Stock Today: The Bear Call Spread
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways or even slightly higher — as long as the underlying stock stays below the short call at expiry.
An Oct. 25 bear call spread on META stock using the 620-625 strike prices traded around 90 cents this morning. That means we sell the call at 620 to collect premium while we buy the 625 call to give us protection in case the stock rises sharply. Buying the call reduces our profit potential but it also limits the risk, so it's a good trade-off.
The choice of the short call strike at 620 intentionally gives us more room for error in case Meta stock does get back above 600.
Traders selling the spread receive $90 per contract of premium, which is also the maximum profit on the trade. The maximum loss is $410. That's simply the difference of the strikes less the option premium.
A $90 maximum profit might not seem much. But that represents a 22% return on risk between now and Oct. 25. That's not a bad return for just a couple of weeks, and you might have more than one contract depending on how much risk you can take for your portfolio.
A Leaderboard-Quality Stock
According to IBD Stock Checkup, Meta stock ranks second in its group. Meta scores a Composite Rating of 97, an EPS Rating of 97 and a Relative Strength Rating of 92. Those superior ratings plus compelling chart action led to its addition on Leaderboard Sept. 13. That product is already looking at a 12% gain from the time of its alert to subscribers.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. You always know the worst-case scenario in advance.
Additionally, you don't need to wait until expiration to close the trade. If Meta stock pops and looks like it may resume its run, you could set a stop loss if it gets materially above 600. Or cut the loss if the spread starts trading at $1.80.
Though the bear call spread is bearish, as the name implies, it's forgiving. With Meta stock trading below 600 this morning, the spread still delivers its maximum profit as long as shares stay below 620 on the Oct. 25 expiration. The maximum loss is only suffered if Meta closes above 625 at expiration. The position starts with a delta of -3, meaning it is roughly equivalent to being short three shares of Meta stock.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
